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Social Security Privatization and the Annuities Market

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Social Securitys long-term financing problem has fueled a debate about fundamentally changing the current System. Under the rubric of privatization advocates have devised many plans to divert a portion of the payroll tax into private retirement accounts. Within the regulatory framework of the new system, the owners of those accounts could then decide how to invest their funds Proponents of privatization have devoted most of their efforts to deciding how much should be accumulated in those accounts and how transition costs should be divided among current and future generations, while virtually ignoring how retirees will draw down the accumulated funds for use in old age. Currently, most retirees receive an inflation-indexed life annuity from Social Security. If the beneficiary is married or has dependent children, Social Security also pays benefits to survivors. Many people also receive annuity payments from private pensions.2 Annuities like Social Security provide insurance against longevity risk-that is, the risk of outliving personal resources. An annuity provides a stream of payments for an agreed-upon period of time a life annuity provides payments for as long as the annuitant is alive and protects against longevity risk. The insurer an insurance company or the government absorbs the uncertainty about longevity and pools many annuitants. Since some annuitants live longer and others die earlier than expected, the annuity provider can protect each individual against life span uncertainty and be subject only to the uncertainty about the average life span of the population. Without access to annuities, consumers must divide their resources according to their expectations about longevity after retirement. They may find themselves without sufficient resources if their actual life span exceeds what they had expected.

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  • Economics and Cost Analysis
  • Government and Political Science

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